Social Housing Speed Read – HMRC reviews policy on reduced VAT for installation of energy-saving measures
29th April, 2019
In this week's Speed Read, we discuss HMRC's decision to review its policy on the application of reduced VAT rates to installation of certain energy-saving measures.
Why are HMRC reviewing the policy?
Under current UK law, a reduced rate of VAT of 5% applies to installation of certain energy-saving materials (“ESMs”) into any residential accommodation, as well as the supply of the ESMs installed by the person installing them, under Group 2 of Schedule 7A to the VAT Act 1994.
On 4 June 2015, following an infraction of the UK by the European Commission, the Court of Justice of the European Union held that the scope of the VAT relief was too wide. As such, the UK was obliged to amend the legislation to narrow the scope of the reduced rate. HMRC originally published a consultation document together with proposed draft legislation on 9 December 2015, which set out significant reductions to the existing availability of the VAT relief.
This was a worry to a number of parties, including housebuilders and housing associations, as it would have increased the costs of installing ESMs in new properties. However, on 8 April HMRCissued a further consultation document on the revised draft legislation which reduces the extent of the restrictions to the relief.
What are the new proposals?
The revised draft legislation is currently due to come into force on 1 October 2019 and will amend the current law as follows:
- The relief will continue to apply to supplies of the installation of ESMs made to all customers except where the value of the installed ESMs exceeds 60% of the cost of the total supply to the customer. In these cases, only the labour element of the supply will qualify for the reduced rate of VAT, with the goods element standard rated.
- Installation and supply of ESMs will only be subject to the VAT relief if:
- the customer is 60 or over, or in receipt of certain benefits and the accommodation in which the ESMs are installed is his or her sole or main residence;
- the building in which the ESMs are installed is used solely for a relevant residential purpose; or
- the supply is made to a relevant housing association.
- Installation of wind and water turbines will no longer be subject to the relief. However, solar panels, ground and air source heat pumps, and micro heat and power units, which had had the relief withdrawn in the initial draft legislation, will instead still be subject to the relief.
Installation services on their own will also still be subject to the relief.
What will the impact of the revised proposals be?
Thankfully for housing associations, the anticipated impact of the original proposed legislation has been reduced and they will still be subject to the reduced rate of 5%.
Adam Cutler, VAT director and head of social housing at Crowe UK, has stated that “it seems unfair that charitable housing providers that are not registered will no longer be entitled to the same reliefs”, while this will also be true of unregistered housing associations and other housebuilders.
They will be able to take comfort though in the fact that “energy saving works such as insulation, draught stripping and upgrading heating controls should still incur five per cent VAT as these works are fairly labour-intensive.”
However, Cutler worries that “with some suppliers having already withdrawn from the market as government incentives were drastically reduced, this may mean more of these suppliers can no longer remain viable, reducing choice for housing associations.”
It of course remains to be seen to what extent the current draft legislation is adopted, as this remains in consultation until 3 May 2019. The results of the consultation will be made public in due course and the results of these, and any updates, will be addressed in a future speed read.
If you have any questions on the above and how it will affect social housing providers, or any other questions as a social housing provider, please do not hesitate to contact John Murray or a member of our expert Social Housing Team.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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